A Guide to Property Development Finance
In recent years, the development lending sector has increased drastically providing a variety of competitive options for borrowers either looking to get started in property or continue growing their portfolio.
With lenders becoming increasingly competitive and less stringent with their lending criteria, now is a great time for developers to secure the funding they need for their next project.
What is property development finance?
Property development finance is a type of funding used to finance large-scale construction projects. It is a short to medium-term loan used to support the development of a project. Once the building work is done and the project is completed, the finance is paid off by either the sale of the development or replaced with a long-term funding option.
Unlike traditional mortgages that are secured against the value of a property or land, development finance is secured against the projected gross value of the completed project.
Property development finance can be tailored for each individual project with the funds released in stages. Developers can also request additional funds should unexpected costs arise during the development.
What is property development finance used for?
A property development loan can be used for a wide range of large-scale funding purposes, such as:
- to pay for the construction of new-build residential or commercial properties
- to purchase land to develop on
- to pay for major renovation or refurbishment work
Property development finance is not used for small-scale residential improvements. In this case, a different type of bridging loan is required.
How much property development finance can I borrow?
Property development finance is a funding solution for projects that require large amounts of capital. There is no limit to the amount a borrower can access and the amount a lender is willing to lend will vary from lender to lender.
The loan amount is based on a percentage of the gross development value (GDV) when the project is completed and the overall strength of the developers’ application.
Some lenders have a minimum loan amount of around £50,000 and there are lenders who will only offer their best interest rates for deals between £500,000 and £750,000.
At Ramsay & White, we can arrange property development finance for up to 70% LTGDV (loan to gross development value) and cover up to 100% of the work costs. We can also access a wide range of market lenders to ensure you get the best solution for your project.
What is the average property development finance term?
The maximum term for property development finance is 48 months, with most lenders offering loans up to a maximum of 18-24 months. Loans required for longer than 24 months will restrict the number of lenders willing to accept the application which could also result in additional fees and interest.
The average property development finance term is currently 6 to 18 months.
What do I need to get property development finance?
Once you have established the costs involved with developing your project, it’s time to get your application in place. You should be prepared to provide the lender with the following information:
- Proof of identity
- An outline of any previous development projects you have worked on
- Details of the proposed project you wish to develop
- Details of the professional team involved
- A full breakdown of the development costs
- Financial accounts
- Asset and liability statement
- Estimated gross value of the completed project
- Timeline of the work involved
- Timeline of funds to be released throughout the project
- Details of the planning consent including any restrictions and requirements
- Drawings/plans for the development
- Exit strategy
- Site visit: Some lenders will also be keen to do a face-to-face site visit with the borrower
Using an experienced broker will ensure that your loan application is presented in the format the lender prefers to improve your chances of approval.
What type of security can I use for property development finance?
When acquiring property development finance, most lenders will secure the loan against a property (with an emphasis on residential accommodation) or land with planning permission.
Additionally, some lenders will only consider land with residential planning permission and will not be willing to lend against land for predominantly commercial developments or non-standard construction.
This will vary from lender to lender and will also depend on the details of the project.
What are the costs associated with property development finance?
- Interest rates
The monthly interest payments on a property development loan will depend on the amount borrowed, the experience of the developer, the type of project and the rate offered. As the project progresses and more funds are released, the monthly interest payments will increase.
Most lenders will include the interest in the initial borrowed amount instead of requiring the borrower to pay for it monthly. This is referred to as ‘rolled up’. Interest is then added to the final outstanding amount and while this means the loan amount will go up, it takes the pressure off developers during the build.
- Arrangement fee
The arrangement fee (also known as a facility fee) is usually charged by the lender as a set-up fee for the loan and is typically between 1-2% of the loan amount.
- Exit fee
An exit fee will depend on the lender. Not all lenders charge an exit fee, but the majority do. The fee is paid to the lender when repaying the loan and the fee is typically 1-2% of either the loan amount or GDV (gross development value).
- Broker fees
A Broker will charge a fee to manage your application and find the best suitable lender. Fees vary from brokerage to brokerage, but you can typically expect to pay around 1% of the loan amount.
- Valuation fees
The lender will require a professional valuation of the property to complete the development report. Again, this will vary based on the surveyor you choose, but in general, the fees tend to be higher for expensive developments.
- Professional fees
In addition to paying a surveyor, the project will require a range of professionals including architects, solicitors and project managers. Often these fees can be included in the loan.
How to get property development finance?
When seeking property development finance, you can opt to go direct to the lender or via a broker.
A broker will approach the right lender to suit the needs of the development, ensure your application is completed to meet the requirements of the lender and work hard to get the bet rate agreed. They will also manage the whole process to make sure it runs as smoothly as possible so that the loan can be approved quickly.
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